Selling Mom's House

[chamilt2]

My mom has been in nursing home since 2015.  We started renting her house in 2016 and it is still rented today.  We have received a very interesting cash offer from someone who wants to buy the property, but I am worried what the tax implications would be for this sale at this time.  I don't think it would qualify for the primary residence exemption since it has been rented during the last 5 years.

if she is required to pay capital gains - is it a graduated scale ie:  you clear $50k gain on the property...  the first $40k taxed at 0%, next $10k at 15%, and so on if she were to make more gain off the property?

Can anyone provide some guidance with regards to what her tax implication might beif we take this offer?  Otherwise, I will just continue to  rent the property until it would be transferred as part of her estate.

[chamilt2]

Sorry - an update...  i misread the capital gains chart.  it was related to income levels and not the amount of capital gains...  so that leads me to another question - since her taxable income each year is never more than $40k based on previous year's tax returns - does that mean she would be in the zero% long term capital gains rate?

[rjs · Accepted solution]

No, it doesn't mean that. The gain would not all be taxed at the same rate. Here's an example to illustrate how it works. Suppose her taxable income, without the capital gain, is $30,000, and her gain on the house is $100,000. The first $10,000 of gain would be taxed at 0%. The $30,000 of other taxable income plus $10,000 of the gain uses up the $40,000 in the 0% bracket. The remaining $90,000 of gain will be taxed at 15%. If the gain on the house is enough to go over the top of the 15% bracket, the remaining gain would be taxed at 20%.

In addition, if her modified AGI is more than $200,000 she would be subject to 3.8% Net Investment Income Tax on the amount over $200,000 (assuming she files as single).

[Mike9241]

since it was rental property depreciation should have been taken.  upon sale the lesser of the depreciation, taken or that should have been taken, or the gain is recaptured as section 1250 gain.  the tax on that can be up to 25%. only the excess of the gain over the section 1250 recapture is taxed as a long-term capital gain.   if depreciation was not taken consult with a tax pro.  

[chamilt2]

yes depreciation was taken thanks to turbotax 😉

[chamilt2]

we have decided not to sell the property at this time (even though the market is so high and the all cash deal was quite lucrative on the first look.  The tax implications now will be far worse (from what i can see/read) than letting the property transfer later as part of the estate.